CVS Health Corp (CVS) Announces 3Q:16 Results; Shares Fall 13%

CVS Health Corp (NYSE:CVS) announced operating results for the three months ended September 30, 2016.

President and Chief Executive Officer Larry Merlo stated, “We posted a solid third quarter with the PBM exceeding our expectations and retail performing at the lower end of our expectations. However, very recent pharmacy network changes in the marketplace are expected to cause some retail prescriptions to begin migrating out of our pharmacies this quarter. In addition, we are currently experiencing slowing prescription growth in the overall market as well as a soft seasonal business. These factors combined are leading us to reduce the mid-point of our guidance for this year by five cents per share. The network changes have more significant implications for our 2017 outlook. While we expect a healthy increase in PBM operating profit growth in 2017, we expect a decrease in retail operating profit growth.”

Mr. Merlo continued, “We remain confident in our model and we are targeting 10% growth in Adjusted EPS for the longer term, as we continue to introduce new and innovative ways to drive value for patients, payors, and providers.”

Revenues

Net revenues for the three months ended September 30, 2016 increased 15.5%, or $6.0 billion, to $44.6 billion, compared to the three months ended September 30, 2015. Revenues in the Pharmacy Services Segment increased 19.2%, or $4.9 billion, to $30.4 billion in the three months ended September 30, 2016. The increase was primarily driven by increased pharmacy network claim volume and growth in specialty pharmacy. Pharmacy network claims processed during the three months ended September 30, 2016 increased 23.3% to 282.6 million, compared to 229.1 million in the prior year. The increase in pharmacy network claim volume was primarily due to the growth in net new business. Mail choice claims processed during the three months ended September 30, 2016, increased 2.5%, to 22.4 million, compared to 21.9 million in the prior year. The increase in mail choice claims was primarily driven by the continued adoption of our Maintenance Choice® offerings.

Revenues in the Retail/LTC Segment increased 12.5%, or $2.2 billion, to approximately $20.1 billion, in the three months ended September 30, 2016. The increase was primarily driven by the addition of the long-term care (“LTC”) pharmacy operations acquired as part of the acquisition of Omnicare, Inc. (“Omnicare”) in August 2015, the addition of the pharmacies and clinics of Target Corporation (“Target”) acquired in December 2015 and pharmacy same store sales growth. Same store sales increased 2.3% versus the third quarter of 2015. Pharmacy same store sales rose 3.4% and pharmacy same store prescription volumes rose 3.0% on a 30-day equivalent basis. Pharmacy same store sales were negatively affected by approximately 340 basis points from recent generic drug introductions. Front store same store sales decreased 1.0%, which were negatively affected by softer customer traffic partially offset by an increase in basket size.

For the three months ended September 30, 2016, the generic dispensing rate increased approximately 160 basis points to 85.4% in the Pharmacy Services Segment and increased approximately 100 basis points to 85.8% in the Retail/LTC Segment.

Operating Profit

For the three months ended September 30, 2016, consolidated operating profit increased $486 million, or 20.9%. Excluding acquisition-related integration costs of $65 million in 2016 and acquisition-related transaction and integration costs of $127 million in 2015, consolidated operating profit increased $424 million, or 17.3%, from $2,458 million for the three months ended September 30, 2015 to $2,882 million for the three months ended September 30, 2016. For the three months ended September 30, 2016, operating profit increased $296 million, or 25.3%, to $1,458 million in the Pharmacy Services Segment and $130 million, or 7.9%, to $1,773 million in the Retail/LTC Segment. Excluding acquisition-related integration costs of $52 million and $12 million in the three months ended September 30, 2016 and 2015, respectively, the Retail/LTC Segment operating profit grew $170 million, or 10.3%, to $1,825 million for the three months ended September 30, 2016. Both segments benefited from increased generic drugs dispensed. The Pharmacy Services Segment was also positively affected by growth in specialty pharmacy, growth in Medicare Part D lives and favorable purchasing economics. The Retail/LTC Segment was also positively affected by the acquisition of the pharmacies and clinics of Target and the acquisition of Omnicare’s LTC business as well as an improved front store margin rate. These positive factors for both segments were partially offset by continued pricing in the Pharmacy Services Segment and reimbursement pressure in the Retail/LTC Segment.

Net Income and Earnings Per Share

Net income for the three months ended September 30, 2016 was $1.5 billion, an increase of $294 million or 23.6%. The increase in net income is primarily due to the $486 million increase in operating profit discussed above partially offset by a $101 million loss on early extinguishment of debt. Net income also benefited, by approximately $0.05 per share, from a lower income tax rate, which was primarily due to the resolution of income tax matters previously forecasted in the fourth quarter.

GAAP earnings per diluted share from continuing operations (“GAAP diluted EPS”) for the three months ended September 30, 2016 was $1.43, compared to $1.10 in the prior year. Adjusted earnings per share (“Adjusted EPS”) for the three months ended September 30, 2016 and 2015, was $1.64 and $1.28, respectively. Adjusted EPS excludes $197 million and $160 million of intangible asset amortization for the three months ended September 30, 2016 and 2015, respectively. Adjusted EPS for the three months ended September 30, 2016 also excludes $65 million of acquisition-related integration costs and the loss on early extinguishment of debt of $101 million. Adjusted EPS for the three months ended September 30, 2015 also excludes $127 million of acquisition-related transaction and integration costs and $16 million of acquisition-related bridge financing costs. Further detail is shown in the Adjusted Earnings Per Share reconciliation later in this release.

Guidance

The Company lowered and narrowed full year GAAP diluted EPS to $4.84 to $4.90 from $4.92 to $5.00, including acquisition-related integration costs recorded in the nine months ended September 30, 2016. The Company lowered and narrowed full year Adjusted EPS to $5.77 to $5.83 from $5.81 to $5.89. Estimated acquisition-related integration costs for the fourth quarter of 2016 are excluded from the 2016 guidance. Further detail is shown in the 2016 Adjusted Earnings Per Share Guidance reconciliation attached to this release.

In the fourth quarter of 2016, the Company expects to deliver GAAP diluted EPS of $1.52 to $1.58. The Company expects to deliver Adjusted EPS of $1.64 to $1.70. Further detail is shown in the 2016 Adjusted Earnings Per Share Guidance reconciliation attached to this release.

The Company raised cash flow guidance for 2016 and now expects to deliver cash flow from operations of $9.3 billion to $9.5 billion and 2016 free cash flow of $6.8 billion to $7.0 billion. Further detail is shown in the 2016 Free Cash Flow Guidance reconciliation attached to this release.

2017 Preliminary Outlook

The Company provided a preliminary outlook for 2017. GAAP diluted EPS is expected to be in the range of $5.16 to $5.33 and Adjusted EPS is expected to be in the range of $5.77 to $5.93. Included in this outlook is the impact from the projected loss of more than 40 million retail prescriptions related to marketplace changes, including new retail pharmacy networks that are excluding CVS Pharmacy drugstores. The GAAP outlook includes the expected impact of the previously-announced termination of one of the Company’s pension plans and excludes the impact of integration costs related to the acquisition of Omnicare, which will be updated as the year progresses. Further detail is shown in the 2017 Preliminary Outlook reconciliation later in this release.

New Share Repurchase Authorization

The share repurchase authorization approved in December 2014 is nearing completion with approximately $3.7 billion remaining. Reflecting the board’s ongoing commitment to returning value to shareholders, the Company announced that, consistent with its practice, the board of directors approved a new share repurchase program for up to $15 billion of the Company’s outstanding common stock. Combined with the approximately $3.7 billion that remains from the 2014 program, the Company has approximately $18.7 billion available for share repurchases. The share repurchase authorization, which is effective immediately and is expected to be completed over a multi-year period, permits the Company to effect the repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions.

Real Estate Program

During the three months ended September 30, 2016, the Company opened 48 new retail stores and closed 6 retail stores. In addition, the Company relocated 11 retail stores. As of September 30, 2016, the Company operated 9,694 retail stores, including pharmacies in Target stores, in 49 states, the District of Columbia, Puerto Rico and Brazil.(Original Source)

Shares of CVS Health are currently trading at $72.71, down $10.68 or -13%. CVS has a 1-year high of $106.67 and a 1-year low of $69.30. The stock’s 50-day moving average is $87.82 and its 200-day moving average is $94.68.

On the ratings front, CVS has been the subject of a number of recent research reports. In a report issued on October 17, Deutsche Bank analyst George Hill maintained a Hold rating on CVS, with a price target of $99, which represents a potential upside of 42% from where the stock is currently trading. Separately, on October 13, Leerink Swann’s David Larsen reiterated a Buy rating on the stock and has a price target of $105.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, George Hill and David Larsen have a yearly average loss of 3.4% and 2.3% respectively. Hill has a success rate of 41% and is ranked #3594 out of 4181 analysts, while Larsen has a success rate of 35% and is ranked #3324.

Sentiment on the Street is mostly bullish on CVS stock. Out of 8 analysts who cover the stock, 6 suggest a Buy rating and 2 recommend to Hold the stock. The 12-month average price target assigned to the stock is $107.80, which represents a potential upside of 55% from where the stock is currently trading.

CVS Health Corp. engages in the provision of pharmacy health care provider in the U.S. It operates its business through three business segments: Pharmacy Services, Retail/LTC and Corporate. The Pharmacy Services segment provides a full range of pharmacy benefit management services to its clients consisting primarily of employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the U.S. This segment operates under the CVS Caremark Pharmacy Services, Caremark, CVS Caremark, CarePlus CVS/pharmacy, CarePlus, RxAmerica and Accordant names. The Retail/LTC segment includes retail drugstores, its online retail pharmacy website, CVS.com, onsite pharmacy stores and its retail health care clinics. The Corporate segment provides management and administrative services to support the overall operations of the company.